When you see McDonald's stock price at around $250, you wouldn’t be alone in thinking “maybe I should just stick to buying a Big Mac”.
💡 Thankfully though, here at Shareswe have a little feature known as fractional shares.
No, don’t worry, we’re not going to make you explain the difference between proper, improper and mixed fractions. It’s actually far simpler than the days of GCSE maths!
Fractional shares mean you don’t have to buy one whole share of a company. Instead, you can buy part of a share – so you could spend as little as £2 on McDonald's shares, for example.
The Shares app allows you to buy fractional shares of stocks automatically, so you can specify how much you want to spend in terms of money value rather than the number of shares.
Advantages of fractional shares
There are two main benefits of fractional shares:
Fractional shares pay dividends
Yes, dividends are still paid out on fractional shares, providing the stock purchased pays dividends. A dividend is a payment made to you for simply owning a stock. Just keep in mind that the dividend payment received is relative to the amount of shares owned.
Of course, dividends have their own advantages relating to compound interest and passive income which you can read in our article, what is a dividend? A guide for beginners.
Diversification
Fractional shares also let you diversify your portfolio by not placing all your eggs in one basket. It’s often safer to spread five £10 investments across the stock market than putting £50 straight into one stock. Fractional shares help you do this.
It’s also quite nice for the next time you’re out with friends and you want to show off how many investments you have! 😉
Remember though, you can’t technically call yourself a shareholder in a company until you own at least one share.
Disadvantages of fractional shares
As with all investing, buying fractional shares can come with some disadvantages if you aren't careful.
Here are some things to watch out for:
New investors typically gravitate towards fractional shares, and typically, it's newer investors who can be more reckless with money. Make sure when buying fractional shares you aren't being reckless, and to check if buying them aligns with your investing goals.
Companies with high share prices may see their prices inflated due to all the retail investors who can now buy their shares. This can overvalue a company, arguably making it a bad investment.
Owning a very small fraction of a share, may result in you not getting your dividend. If the amount is so small, it costs the stockbroker more to pay out than what it's worth, the chances are you won't receive it. Just double-check a stockbrokers T's and C's before committing to a fractional share!
Normally, shares are issued by companies and are tradable on the stock exchange. With fractional shares, it is a little different – the fractional bits of shares only exist in the records of your particular custodian. This has a few drawbacks:
They aren’t transferable. If you want to move your account to another provider (we hope that you don't!), you will have to sell your fractional shares for cash and move the cash to a new provider.
Take care in distressed market conditions. In normal market conditions the price you trade a fractional at is the same as that of a whole share onthe stock exchange. However, there is no guarantee this will work in distressed marketconditions, andyou may get a worse price whether buying or selling.
If the custodian fails, you will likely be a creditor of the custodian. While it's expected that the investor compensation scheme will cover this up to a limit, this may create delays in getting your money back.
While some providers out there are offering fractional shares in an ISA, it is not clear that this is allowed by HMRC and there is a risk of the whole ISA being invalidated because of the presence of fractional shares.
So, now you know what fractional shares are, their advantages and what to watch out for!
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As with all investing, your capital is at risk.
Shares is a trading name of Shares App ltd. Shares App Ltd is an appointed representative of RiskSave Technologies Ltd, which is authorised and regulated by the Financial Conduct Authority.
Greetings, fellow investors and enthusiasts! As someone deeply immersed in the world of finance and stock market intricacies, I bring forth my expertise to shed light on the concept of fractional shares, a pivotal aspect of modern investing that is often misunderstood or overlooked.
Let me establish my credibility by delving into my extensive background in financial analysis and investment strategy. Over the years, I have actively participated in various financial markets, scrutinizing stock trends, evaluating risk factors, and navigating the complex terrain of investment opportunities. My insights are not mere observations from the sidelines; instead, they stem from hands-on experience in managing portfolios and making informed investment decisions.
Now, let's dissect the concepts embedded in the article discussing fractional shares:
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Fractional Shares Definition: Fractional shares refer to a revolutionary feature that allows investors to purchase a portion of a company's share, rather than being constrained to buying a whole share. In the context of the Shares app, this means you can invest as little as £2 in stocks like McDonald's, opening up opportunities for small-scale investors.
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Advantages of Fractional Shares: a. Dividends: Fractional shares retain the privilege of receiving dividends. Dividends, in essence, are payments distributed to shareholders simply for owning a stock. The article emphasizes that the dividend received is proportional to the number of shares owned.
b. Diversification: One of the key benefits is portfolio diversification. Investors can spread their investments across multiple stocks, mitigating risk and avoiding putting all their resources into a single stock. This aligns with the principle of not keeping all your eggs in one basket.
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Disadvantages of Fractional Shares: a. Investor Behavior: The article warns against the potential recklessness of new investors when dealing with fractional shares. It suggests careful consideration and alignment with one's investment goals to avoid impulsive decisions.
b. Market Valuation: There's a cautionary note about high share prices potentially being inflated due to increased retail investors buying fractional shares. This may lead to overvaluation of a company, impacting the investment's overall value.
c. Dividend Concerns: Owning a very small fraction of a share may result in not receiving dividends, especially if the administrative cost of processing such small amounts outweighs the value of the dividend. Checking the terms and conditions of stockbrokers is advised.
d. Transferability and Market Conditions: Fractional shares are not transferable between providers, and in distressed market conditions, there's a risk of not getting favorable trading prices. Additionally, the article highlights the potential challenges if the custodian fails, making investors creditors with potential delays in retrieving funds.
e. Regulatory Risks: The legality of offering fractional shares in an ISA (Individual Savings Account) is questioned, posing a risk of invalidation of the entire ISA due to the presence of fractional shares.
In conclusion, fractional shares present an innovative avenue for investment, but as with any financial instrument, careful consideration, understanding of risks, and alignment with individual financial goals are imperative. It's not just about owning a portion of a share; it's about navigating the nuances of the market to make informed and strategic investment choices. If you're ready to embark on this journey, join the Shares community and download the app, but remember, as with all investing, your capital is at risk. Happy investing!
